International Trade Theories (Mercantilism, Absolute Cost Advantage, Comparative Cost Advantage Theory, Factor Endowment Theory, International Product Life Cycle Theory, Porter’s Diamond Theory, and New Trade Theory) Unit IV MBA Pokhara University

 

International Trade Theories 

International trade enhances economic efficiency, fosters global cooperation, and improves living standards by providing access to a wider variety of goods and services. However, it can also lead to trade disputes and job displacement in certain industries.

International trade refers to the exchange of goods, services, and capital across international borders. It allows countries to expand their markets, access resources not available domestically, and benefit from comparative advantage—producing goods more efficiently than other nations.

Reasons for International Trade

1.     Resource Availability – Some countries lack certain materials (e.g., Nepal imports oil).

2.     Cost Efficiency – Producing goods where labor/materials are cheaper (e.g., China manufacturing electronics).

3.     Consumer Demand – Access to diverse products (e.g., French wine in the U.S.).

4.     Economic Growth – Boosts GDP by increasing exports (e.g., Germany’s auto exports).

Examples of International Trade

1.     Goods Trade

o    U.S. imports electronics from China & India (e.g., iPhones).

o    Saudi Arabia exports oil to Europe and Asia.

o    Brazil exports coffee to the U.S. and Europe.

2.     Services Trade

o    India’s IT services (e.g., software outsourcing to the U.S.).

o    U.K. financial services (e.g., London-based banks serving global clients).

3.     Capital Trade

o    Foreign Direct Investment (FDI) – Tesla building a factory in Germany.

o    Portfolio Investments – U.S. investors buying stocks in Japanese companies.

Trade Policies & Organizations

• Free Trade Agreements (FTAs) – NAFTA (now USMCA) between U.S., Canada, Mexico.
• Tariffs & Quotas – U.S. tariffs on Chinese steel to protect domestic producers.
• WTO (World Trade Organization) – Regulates global trade rules.

1.     Mercantilism

The core concept of mercantilism revolved around the idea that the world's wealth (especially in the form of precious metals like gold and silver, known as bullion) was finite. Mercantilism is an economic theory and practice that was dominant in Europe from the 16th to the 18th century. Therefore, for one nation to gain wealth, another nation must lose it. This led to a zero-sum game approach to international trade and economic policy.

It emphasized the role of the state in managing the economy to enhance national power, wealth, and self-sufficiency.

During the British colonial era, British India is a classic example of mercantilism, where economic policies were designed to benefit the imperial power through exploitation of the colony’s resources and markets, leading to long-term economic harm to the Indian subcontinent.Top of Form

Bottom of Form

Principles:

• Wealth equals power: Accumulation of precious metals meant a powerful state.
• Export promotion and import restriction: To ensure a trade surplus.
• Colonial expansion: Colonies served as sources of raw materials and markets for exports.
• Strong state control: Government intervened in the economy to promote national interest.
• Protectionism: Use of tariffs and quotas to restrict imports.

Mercantilism in British Colonial India

1.     India as a Raw Material Source:

India supplied raw materials like cotton, indigo, jute, opium, and tea to fuel British industries.

These materials were exported at low cost to Britain.

2.     India as a Captive Market:

Indian markets were flooded with British manufactured goods.

Heavy import of British goods and destruction of Indian industries made India dependent on Britain.

3.     Deindustrialization of Indian Economy:

British policies ruined Indian handicrafts and textile industries (e.g., Bengal textile sector).

Indian goods faced heavy export duties, while British goods entered duty-free.

4.     Monopoly and Trade Control:

The British East India Company held trade monopolies.

Indian traders and producers had limited rights and faced restrictions.

5.     Infrastructure for Colonial Exploitation:

Railways, roads, and ports were built to extract and export resources efficiently.

These were not intended for the economic development of India.

6.     Drain of Wealth:

Large amounts of Indian wealth were transferred to Britain without fair compensation.

Dadabhai Naoroji described this as the "Drain of Wealth."

7.     High Taxation and Famines:

Heavy land revenue and export of food grains led to poverty and repeated famines.

Resources were prioritized for export over local needs.

8.     Suppression of Indian Industry:

Indians were discouraged or prohibited from developing industries that could compete with British firms.

Assumptions of Mercantilism

• Finite wealth: Wealth (especially gold and silver) is limited; thus, nations must compete to obtain a larger share.
• Zero-sum game: One country's gain is another's loss.
• Trade is inherently competitive, not cooperative.
• National interest supersedes individual or global welfare.
• State intervention is essential to direct economic activity.
• Colonies exist primarily to serve the mother country's economic interests.

Merits of Mercantilism

• Nation-building: Helped in strengthening central governments and forming modern nation-states.
• Industrial growth: Encouraged domestic manufacturing through subsidies and support.
• Infrastructure development: Mercantilist policies led to the building of roads, ports, and ships to promote trade.
• Promotion of exports: Laid the foundation for a global trade system.
• Colonial expansion and global integration (though exploitative, it connected economies worldwide).

Demerits of Mercantilism

• Colonial exploitation: Colonies were heavily exploited for raw materials and denied fair trade.
• Suppression of free trade: Overemphasis on protectionism stifled economic freedom and efficiency.
• Neglect of consumer interests: High prices and limited choices due to import restrictions.
• Stagnation and inequality: Focus on bullion accumulation neglected broader development.
• War and conflict: Competition for wealth and colonies led to frequent wars.

Is Mercantilism Possible or Relevant Today?

Modern Relevance:
While classical mercantilism is largely outdated, neo-mercantilist tendencies still exist in modern economic policies. Many countries adopt protectionist measures and focus on export-led growth, echoing mercantilist logic.

Contemporary Examples of Neo-Mercantilism:

• China’s export-driven model: Heavy state involvement in guiding industries, currency management, and promoting exports.
• U.S. tariffs under the Trump administration: "America First" trade policies and trade wars (especially with China).
• India’s Atmanirbhar Bharat (Self-Reliant India): Promotes domestic production and reduces dependence on imports.

Can it fully work today?

No, not fully. While elements can be used strategically, full-scale mercantilism is incompatible with the modern globalized economy for the following reasons:

Interdependence: Nations are deeply interconnected through global supply chains.

International institutions: WTO, IMF, and trade agreements discourage extreme protectionism.

Inflationary risks: Hoarding gold or suppressing imports may cause domestic inflation and inefficiencies.

Retaliation: Protectionist policies often provoke trade wars, harming global and national interests.

Shift in value systems: Emphasis today is more on sustainable, inclusive, and cooperative economic growth.

Porter’s Diamond Theory

Developed by Michael Porter in 1990, the Diamond Model (also called the Theory of National Competitive Advantage) explains why certain industries in specific nations become globally competitive. Unlike traditional trade theories (e.g., comparative advantage), Porter argues that national competitiveness depends on dynamic factors like innovation, competition, and strategic industry clusters, rather than just natural resources or labor costs.

Porter’s Diamond Model identifies four key determinants that shape a nation’s competitive advantage in specific industries. These factors interact dynamically, creating an environment where industries can thrive globally.

1.     Factor Conditions:

This determinant goes beyond simple availability. Porter emphasizes the distinction between basic factors and advanced factors, and also between generalized factors and specialized factors.

Basic Factors: These are naturally endowed or easily acquired, such as natural resources (e.g., oil fields, fertile land), climate, location, and unskilled labor. While they can provide an initial advantage, they are often easily imitated or purchased by foreign competitors. For example, a country might have vast oil reserves, but unless it develops advanced extraction and refining technologies, and a skilled workforce to manage them, the long-term competitive advantage might be limited.

Advanced Factors: These are created through investment in education, research, and infrastructure. Examples include a highly skilled workforce (engineers, scientists, designers), a sophisticated knowledge base (universities, research institutions), modern communication and transportation infrastructure, and accessible capital markets. These factors are much harder for competitors to imitate and are crucial for sustained competitive advantage.

Generalized vs. Specialized Factors: Generalized factors (e.g., a general education system, broad financial capital) can be useful in many industries.

Specialized factors (e.g., a university specializing in nanotechnology, a venture capital firm focused on biotech startups) are highly tailored to a specific industry and are more critical for developing deep, specialized competitive advantages.

Porter's Key Insight: A nation does not inherit but creates the most important factors of production. A lack of basic factors can even be an advantage, forcing companies to innovate and develop advanced, specialized factors (e.g., Japan's lack of raw materials led to expertise in miniaturization and efficient resource use).

Japan, famously resource-poor, has cultivated world-leading expertise in robotics, advanced materials, and precision manufacturing. This stems from decades of investment in highly specialized engineering education, strong industry-university collaboration for R&D, and sophisticated manufacturing infrastructure. These are advanced and specialized factor conditions that are difficult for other nations to replicate quickly.

2.     Demand Conditions:

This refers to the characteristics of the domestic market for an industry's products or services. It's not just about the size of the market, but its quality and sophistication.

Demanding Customers: When domestic customers are discerning, knowledgeable, and have high expectations regarding quality, features, and performance, they push companies to innovate relentlessly. This constant pressure to meet stringent domestic demands prepares firms to compete effectively in more diverse and demanding international markets.

Anticipating Global Trends: A strong domestic demand that mirrors or anticipates global trends can give local firms an early advantage. They can test new products and refine their offerings in their home market before expanding internationally.

Specialized Demand: Specific national tastes or needs can foster specialized industries that later find global niches.

Porter's Key Insight: Domestic buyers "pull" companies to innovate and upgrade. They act as a critical early warning system for future market needs and trends.

South Korea's highly connected and tech-savvy population, with a strong demand for cutting-edge smartphones, smart home devices, and fast internet services, has significantly driven Samsung's relentless innovation in electronics. Korean consumers quickly adopt new technologies and demand high performance and rich features, forcing Samsung (and its domestic rivals) to continuously push the boundaries of product development, which then translates into global competitiveness.

3.     Related and Supporting Industries:

This refers to the presence within a nation of internationally competitive supplier industries and other related industries that provide inputs, technology, and services to the core industry.

Clusters: Competitive advantage often arises from "clusters" of industries that are geographically concentrated and mutually supportive. This allows for rapid information flow, collaboration, and specialized expertise.

Cost-Effective Inputs: When local suppliers are competitive and innovative, they provide the core industry with high-quality, cost-effective, and timely inputs, reducing reliance on distant or less reliable foreign sources.

Innovation Spillover: Close proximity and interaction among related industries lead to knowledge spillovers, informal sharing of ideas, and the co-development of new technologies and processes. This synergy fosters a dynamic environment for innovation.

Creation of New Industries: A strong cluster can also lead to the spawning of entirely new, related industries as firms identify new opportunities or specialize further.

Porter's Key Insight: A robust ecosystem of supporting industries creates a virtuous cycle of innovation and efficiency, making the entire cluster more competitive.

Italy's preeminence in high fashion (clothing, luxury goods) is not just about its famous designers. It's underpinned by a sophisticated network of highly skilled textile manufacturers, leather goods suppliers, specialized machinery producers, design schools, and skilled artisans, all located in close proximity. This dense cluster allows for rapid prototyping, quality control, and the seamless exchange of creative ideas and technical expertise.

4.     Firm Strategy, Structure, and Rivalry:

This determinant encompasses the way companies are created, organized, and managed in a nation, and critically, the intensity of domestic competition.

Domestic Rivalry: This is arguably the most powerful stimulant for competitive advantage. Fierce domestic competition forces companies to continuously innovate, improve productivity, reduce costs, enhance quality, and find unique ways to differentiate themselves. Companies that survive and thrive in an intensely competitive home market are well-prepared to face global rivals. Without strong domestic rivalry, firms can become complacent and less competitive internationally.

Management Styles and Organizational Structures: The prevailing management philosophies and organizational structures within a nation can significantly influence a firm's ability to compete. For instance, some national cultures might favor hierarchical structures, while others might encourage flatter, more agile organizations, each with implications for innovation and responsiveness.

Goals of Firms and Individuals: The objectives that companies set for themselves (e.g., market share vs. profitability, long-term growth vs. short-term gains) and the career aspirations of their employees also play a role.

Porter's Key Insight: Domestic rivalry is more direct and immediate than international competition, serving as a powerful "crucible" that forges strong, globally competitive firms.

Germany's automotive industry, with giants like BMW, Mercedes-Benz, Audi, and Porsche (all part of larger groups but distinct brands competing fiercely), exemplifies intense domestic rivalry. This competition among top-tier brands on quality, engineering, innovation (e.g., electric vehicles, autonomous driving), and performance has consistently pushed them to excel, making them global leaders in the luxury and performance segments.

3. Considerations (How the Diamond Works)

• The components are interconnected and mutually reinforcing.
• Nations gain competitive advantage in industries where the diamond is strongest.
• The theory emphasizes dynamic processes like innovation, upgrading, and productivity.
• Clusters (geographic concentrations of interconnected companies and institutions) amplify the effect.

4. Limitations / Criticism of Porter’s Diamond Theory

1.     Too Home-Country Focused:

Overemphasizes domestic environment while ignoring global supply chains and multinational enterprises.

In today’s world, companies often source inputs and talent internationally.

2.     Less Relevant for Developing Countries:

Assumes the existence of sophisticated domestic markets and industries.

Many developing nations lack strong factor conditions or related industries.

3.     Ignores Role of Foreign Direct Investment (FDI):

The model doesn’t fully explain how foreign companies contribute to competitiveness in a host nation.

4.     Limited Explanation for Small or Resource-Rich Economies:

Countries like Qatar or UAE have competitive advantages due to natural resources, not diamond factors.

5.     Static Framework:

Critics argue it doesn’t fully capture rapidly changing global dynamics, digital disruption, or geopolitical factors.

The Success of Germany in the Automotive Industry

Factor Conditions: Highly skilled engineers, world-class infrastructure.

Demand Conditions: Quality-focused domestic consumers demand safe, innovative cars.

Related Industries: Strong engineering, steel, electronics sectors.

Firm Strategy & Rivalry: Intense local competition among Mercedes-Benz, BMW, Audi, etc.

Government: Vocational training and research support.

Chance: Post-WWII reconstruction drove industrial development and innovation.

New Trade Theory

New Trade Theory argues that international trade is not only driven by differences in resources or technology but also by economies of scale, network effects, and increasing returns to scale. It explains why countries with similar resources and technologies still engage in intra-industry trade (e.g., both Germany and Japan export cars).

New Trade Theory (NTT) emerged in the late 1970s and early 1980s, primarily developed by economists like Paul Krugman (Nobel Prize winner, 2008). It challenges the classical and neoclassical trade theories (like Ricardian and Heckscher-Ohlin models), which focused on comparative advantage and factor endowments.

Key Reasons for the Emergence of New Trade Theory (NTT)

New Trade Theory emerged because earlier models couldn't explain several key realities of modern global trade—especially the high volume of trade between similar countries, intra-industry exchanges, the role of large firms, economies of scale, and consumer preferences for variety. By integrating concepts like increasing returns to scale, product differentiation, and imperfect competition, NTT provided a more realistic and comprehensive framework for understanding international trade patterns in the 20th and 21st centuries.

1. Inability of Classical Theories to Explain Intra-Industry Trade: Traditional trade theories, such as Ricardian Comparative Advantage and the Heckscher-Ohlin model, predicted that countries would specialize in producing and exporting goods based on their relative advantages in resources or productivity. For instance, labor-rich countries would export textiles, while capital-rich nations would export machinery. However, by the mid-20th century, a growing portion of global trade occurred within the same industries—known as intra-industry trade. Examples include Germany and France both exporting and importing cars, or the UK both importing and exporting beer. These patterns occurred between countries with similar economic structures, which classical theories could not adequately explain.

2. Trade Between Economically Similar Countries: Classical models assumed that the most significant trade would happen between countries with contrasting factor endowments or technological capabilities. In contrast, real-world data showed that most global trade takes place between developed countries with similar income levels, technologies, and resources. This contradicted traditional assumptions and highlighted the need for a new framework to explain such trade dynamics.

3. Importance of Economies of Scale: Old theories generally assumed constant or diminishing returns to scale—where producing more didn’t lead to cost reductions. However, in many modern industries (like technology, manufacturing, and services), increasing returns to scale are common: as production volume rises, the average cost per unit decreases. This creates incentives for firms to scale up beyond the domestic market and look for international buyers to maintain efficiency—something traditional theories did not account for.

4. Consumer Demand for Variety and Product Differentiation: Classical trade models treated goods as uniform and interchangeable (e.g., "wheat" or "cloth"). In reality, consumers across countries desire variety and differentiated products—for example, different brands, styles, and models of cars, clothes, or electronics. This means that countries may simultaneously export and import variations of the same product, leading to intra-industry trade, which older theories failed to explain.

5. Presence of Imperfect Competition: Traditional models assumed perfect competition, where firms are price takers with no control over market outcomes. However, many global industries operate under imperfect competition, such as monopolistic competition or oligopoly. Firms in these markets have some power to set prices and compete strategically. The existence of few, large firms and product differentiation—driven by economies of scale—makes such competition the norm in real-world trade, not the exception.

Limitations / Criticism of New Trade Theory

Government Intervention Risks	Subsidies and protection may lead to inefficiency or trade wars.
Assumes Large Markets	Not applicable to small economies that can't achieve scale easily.
Difficult to Identify Winners	Governments may support wrong industries.
Ignores Environmental and Social Costs	Focuses on scale and trade, not sustainability or equity.
Less Relevant for Basic Commodities	More applicable to high-tech, manufacturing, or branded goods than raw materials.

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Introduction to Business Ethics and Corporate Governance TU BBA BBM Unit I Business and Society

Concept of Ethics

Ethics refers to a system of moral principles that influence how people make decisions and lead their lives. It's about what is right and wrong, just and unjust, fair and unfair. Ethics fundamentally deals with the systematic study of moral principles that dictate what is considered "good" or "bad," "right" or "wrong," "just" or "unjust" in human conduct.

It's a framework for rationalizing moral choices and is distinct from mere legality or social custom, though it often influences both. Ethics guides individuals and groups in discerning how they ought to act, considering the well-being and rights of others, as well as their own integrity.

Example:

Telling the truth even when it might lead to punishment is an ethical action. For instance, a student confessing to a mistake instead of letting someone else take the blame is practicing ethics.

2. Concept of Business Ethics

Business ethics involves applying ethical principles to business situations and activities. It guides how businesses interact with stakeholders like customers, employees, suppliers, and society at large.

• Scope: Business ethics addresses issues ranging from micro-level decisions (e.g., an employee's honesty) to macro-level policies (e.g., corporate environmental impact, global supply chain practices).
• Dynamic Nature: Business ethics is not static; it evolves with societal values, technological advancements, and global challenges. Issues like data privacy, AI ethics, and climate change are constantly reshaping the field.
• Beyond Philanthropy: While philanthropy (donating to charity) is part of CSR, business ethics is embedded in core operations – how a company makes its money, not just how it spends it.

Example: The pharmaceutical company disclosing side effects demonstrates transparency, honesty, and a commitment to customer safety and well-being over short-term sales. This builds long-term trust, which is invaluable in an industry where public confidence is paramount. Conversely, a company that hides side effects might achieve immediate sales but faces severe ethical and legal repercussions (e.g., lawsuits, loss of license, public backlash) in the long run.

                                                   3. Myths about Business Ethics

Addressing common misconceptions about business ethics is crucial to understanding its importance.                                                        

Myth	Reality	Example
Ethics is just common sense	Ethical dilemmas are often complex	A factory manager might think it's "common sense" to fire workers to cut costs, but ethics requires evaluating the human impact too.
Business and ethics don’t mix	Ethics is crucial for long-term success	Companies like Patagonia thrive by prioritizing sustainability and fairness.
Being ethical reduces profits	Ethical firms gain trust and loyalty, boosting performance	Unilever's ethical branding attracts consumers willing to pay more for responsibly-made products.
If it’s legal, it’s ethical	Not all legal actions are moral	Fast fashion brands may legally exploit cheap labor in poor countries, but it is unethical due to poor working conditions.

 

4. Causes and Consequences of Ethical Problems in Business

A. Causes of Ethical Problems

Cause		Example
Profit pressure	Intense pressure to cut costs or boost profits may lead to unethical shortcuts	A car company hides a defect to avoid recalls and protect sales (e.g., Volkswagen emissions scandal).
Weak leadership	Leaders who ignore ethics foster a culture of misconduct	If a CEO ignores workplace harassment, others may do the same.
Ambiguous rules	Vague or missing ethical policies create confusion	An employee might misuse company resources if rules about usage are unclear.
Globalization	Different cultures have different ethical norms	A company might pay bribes abroad where it’s “normal,” though unethical globally.

 

B. Consequences of Ethical Problems

Consequence	Example
Loss of reputation	Facebook (now Meta) faced global backlash over privacy violations (Cambridge Analytica).
Legal action	Wells Fargo was fined billions for creating fake customer accounts.
Employee dissatisfaction	If workers see unethical treatment of peers, morale and loyalty fall.
Financial loss	BP’s Deepwater Horizon oil spill cost billions in fines and reputation damage.

 

5. Major Theories and Frameworks Governing Business Ethics

A. Normative Ethical Theories

These provide moral standards for evaluating right and wrong.

1.      Utilitarianism (Consequentialism) 

This theory is outcome-oriented. The "right" action is the one that produces the greatest good for the greatest number of people. It requires calculating the net benefit (benefits minus costs/harms) of all possible actions for all affected parties. Founder: Jeremy Bentham, John Stuart Mill

 

• Principle:

 Happiness/Utility Maximization: The ultimate goal is to maximize overall happiness, well-being, or utility.

Impartiality: Everyone's happiness or suffering counts equally.

Act vs. Rule Utilitarianism:

Act Utilitarianism: Focuses on the consequences of each individual action.

Rule Utilitarianism: Focuses on the consequences of adopting general rules. A rule is ethical if its widespread adoption would lead to the greatest good (e.g., "always tell the truth” Is a good rule because a world where everyone lies would be chaotic and unproductive).

Example:

A hospital with limited resources gives a ventilator to a younger patient instead of an older one because the younger one has a higher survival chance. The goal is maximum benefit.

In business:

The factory relocation example is a classic utilitarian dilemma. While 50 people lose jobs, the argument is that saving 1,000 jobs (and the company itself) creates a greater overall positive outcome. However, a purely utilitarian approach might overlook the significant suffering of the 50 laid-off workers, or the environmental impact of the new location, unless these are factored into the "greatest good" calculation.

2.      Deontology (Duty-Based Ethics)

Deontology asserts that morality is based on duties and rules, and actions are inherently right or wrong regardless of their consequences. It emphasizes moral obligations and universal principles. (Founder: Immanuel Kant)

• Key Principles: (Do what is morally right, regardless of consequences.)

a.      Categorical Imperative (Immanuel Kant):

                                                  i.      Universalizability: "Act only according to that maxim whereby you can at the same time will that it should become a universal law." If an action cannot be universally applied without contradiction, it's unethical. For example, if everyone broke contracts, the concept of a contract would cease to exist.

                                                ii.      Treat Humanity as an End, Never Merely as a Means: Respect the inherent dignity and autonomy of all individuals. Don't use people as mere tools to achieve your goals. This means avoiding exploitation, deception, or manipulation.

                                              iii.      Autonomy: Rational beings are capable of self-legislation and making their own moral choices.

Business Example: The company recalling a faulty product due to inherent moral obligation, even at a high cost, exemplifies deontology. They have a duty to ensure customer safety and honesty, regardless of the financial impact. This contrasts with a utilitarian approach that might weigh the cost of recall against the cost of potential lawsuits. (Based on rules, duties, and rights.)

3.      Virtue Ethics

Instead of focusing on rules or consequences, virtue ethics centers on the character of the moral agent. It asks: "What kind of person (or company) should I be?" (Founder: Aristotle)

 Key Principles:

• Development of Virtues: Cultivating positive character traits like honesty, integrity, courage, compassion, fairness, and wisdom.
• Practical Wisdom (Phronesis): The ability to discern the right course of action in specific, complex situations through experience and moral insight.
• Eudaimonia (Flourishing): The ultimate goal is human flourishing or living a good life, which is achieved by practicing virtues.
• Business Example: A CEO who prioritizes and rewards honesty, even when under pressure, embodies virtues like integrity and courage. This fosters an organizational culture where ethical behavior is not just a policy but a deeply ingrained characteristic. This leader isn't just following a rule; they are being an ethical person, which inspires others.

• Focuses on developing moral character, not rules or outcomes.
• Emphasizes traits like honesty, integrity, courage, compassion.

1. A leader inspires ethical conduct by example rather than strict rules.

4.      Rights Theory

Rights theory posits that all individuals have fundamental moral rights (e.g., to life, liberty, property, privacy, fair treatment) that should be respected and protected. An action is ethical if it respects these rights.

• Principle: Actions are ethical if they respect the rights of individuals.
• Includes rights to life, freedom, privacy, property, etc.

Example:

A tech company refuses to sell user data because it respects users’ right to privacy, even though it's legal and profitable.

5.      Justice Theory

Justice theory focuses on fairness in the distribution of benefits and burdens, and the fair treatment of individuals within a society or organization. (Founder: John Rawls)

Key Principles (John Rawls' Theory of Justice as Fairness):

Distributive Justice: Fair allocation of resources, opportunities, and outcomes.

• Equality: Treating everyone the same (e.g., equal voting rights).
• Equity: Distribution based on relevant differences like need, merit, or contribution (e.g., progressive taxation, performance-based bonuses).

Procedural Justice: Fairness of the processes used to make decisions. Were the rules applied consistently? Was there an opportunity for input?

Interactional Justice: Fairness in the interpersonal treatment of individuals. Were people treated with respect, dignity, and honesty during interactions?

Example:

A company gives equal pay for equal work regardless of gender or race. It ensures fairness in promotions and hiring practices. (Fair treatment, equality, and equitable distribution of resources.)

B. Applied Ethical Frameworks in Business

These are practical tools used by companies to maintain ethical behavior.

1)     Stakeholder Theory

Developed by R. Edward Freeman, this theory argues that a business should create value for all its stakeholders, not just shareholders. It recognizes the legitimate interests of employees, customers, suppliers, the community, and the environment.

Principle: A business must consider all parties affected by its actions (not just shareholders).

Stakeholders include employees, customers, suppliers, community, environment.

Example:

Tesla's focus on designing eco-friendly cars considers multiple stakeholders. It appeals to environmentally conscious consumers (customer value), contributes to reducing carbon emissions (environmental impact), and potentially attracts employees passionate about sustainability (employee value), alongside generating profit for shareholders. This holistic approach ensures long-term viability and social license to operate.

2)     Triple Bottom Line (TBL)

Coined by John Elkington, TBL extends the traditional focus on financial profit to include social and environmental performance. It measures a company's success not just by "Profit" but also by "People" (social responsibility) and "Planet" (environmental sustainability).

• Focus on People, Planet, and Profit.
• Encourages sustainable and socially responsible practices.

Example:

The coffee company using fair-trade beans (ensuring fair wages and working conditions for farmers – "People"), biodegradable packaging (reducing waste and pollution – "Planet"), while also being profitable ("Profit") perfectly encapsulates TBL. This integrated approach ensures sustainability in its broadest sense.

3)     Corporate Social Responsibility (CSR)

CSR encompasses a company's voluntary actions to operate in an economically, socially, and environmentally sustainable manner, going beyond legal requirements. It's about a company's commitment to contribute to sustainable development by working with employees, their families, the local community, and society at large.

• Companies voluntarily go beyond legal requirements to benefit society and environment.

Example:

Tata Group, a major Indian conglomerate, has a long history of CSR embedded in its ethos, predating the modern concept. Their investments in education, healthcare (e.g., Tata Memorial Centre, a major cancer hospital), and community welfare are not just about charity; they are seen as integral to their responsibility as corporate citizens, building social capital and a strong reputation that supports their diverse businesses.

4)     Code of Ethics / Conduct

These are formal documents that articulate an organization's values, ethical principles, and expected behaviors. They serve as internal guidelines, clarify acceptable and unacceptable conduct, and provide a reference point for employees facing ethical dilemmas.

A document outlining a company’s values, expected behaviors, and rules.

 

Purpose: To prevent misconduct, promote a consistent ethical culture, and provide a basis for disciplinary action if violated.

Example: Google's (now Alphabet's) famous motto "Don't be evil" (later changed to "Do the right thing") served as a powerful, concise ethical guide. While broad, it encouraged employees to question decisions that might prioritize profit over user trust or societal good. It symbolized a commitment to ethical innovation and user focus, distinguishing them from competitors. Effective codes are living documents, regularly reviewed and integrated into training.

1. Concept of Corporate Governance

Corporate Governance refers to the system by which companies are directed and controlled. It involves the mechanisms, processes, and relations used to ensure that a corporation acts in the best interest of its stakeholders — including shareholders, employees, customers, and society.

It encompasses the framework of rules and practices by which a board of directors ensures accountability, fairness, and transparency in a company’s relationship with its stakeholders.

Example:

In the Enron scandal, poor corporate governance allowed executives to hide debt off the balance sheet and mislead investors. This lack of oversight led to the company's collapse, harming employees, shareholders, and the economy.

2. Essential Elements of Good Corporate Governance

Components/ Elements	Explanation	Example
Transparency	Open disclosure of financial and operational information	Infosys regularly publishes detailed annual reports and holds investor meetings.
Accountability	Clear roles and responsibilities; holding management accountable	Tata Group holds its leadership responsible for ethical lapses and performance.
Fairness	Equal treatment of all stakeholders, especially minority shareholders	Global IME Bank ensures that all shareholders receive equal information access.
Responsibility	Ethical and responsible decision-making	Unilever’s sustainability initiatives reflect responsibility toward society.
Independence	Independent board and audit committee to reduce conflicts of interest	Wipro has independent directors to ensure objective decision-making.
Ethical Conduct	Adherence to moral principles and company values	Patagonia’s operations reflect strong ethical commitments to the environment.

3. Evolution of Corporate Governance

Corporate governance has undergone significant transformation, largely in response to major corporate scandals.

• Pre-1990s: Primarily focused on financial compliance and shareholder value. Regulations were less stringent, and the board's role was often seen as less critical for oversight.
• 1990s: A period marked by increasing globalization and a series of high-profile corporate frauds and collapses (e.g., Enron, WorldCom, Tyco). These scandals exposed critical weaknesses in existing governance structures, particularly regarding executive compensation, accounting transparency, and board independence.
• 2002: Sarbanes-Oxley Act (SOX): A landmark U.S. federal law passed in response to the major accounting scandals of the early 2000s. SOX significantly tightened regulations for public companies, mandating greater financial transparency, enhanced auditor independence, stricter corporate accountability (e.g., CEOs and CFOs personally certifying financial statements), and increased penalties for fraud. It had a global ripple effect on governance standards.
• 2000s–Present:
• Rise of CSR: Companies increasingly recognized the importance of their broader societal role.
• Stakeholder-Centric Models: Moving beyond pure shareholder primacy to consider all stakeholders.
• ESG (Environmental, Social, Governance) Principles: A framework gaining immense traction, where investors and stakeholders increasingly evaluate companies not just on financial returns but also on their environmental impact, social responsibility, and quality of governance. This has led to the integration of sustainability reporting and performance into governance metrics.
• Digital Governance: Addressing new challenges related to data security, AI ethics, and cybersecurity risks.

Phase	Description
Pre-1990s	Focused primarily on financial performance; limited regulations.
1990s	Rising corporate fraud and scandals (e.g., Enron, WorldCom) led to reforms.
2002	Sarbanes-Oxley Act (SOX) passed in the U.S. to increase transparency and accountability.
2000s–Present	Rise of CSR (Corporate Social Responsibility), stakeholder-centric models, ESG (Environmental, Social, Governance) principles.

 

4. Similarities and Dissimilarities Between Business Ethics and Corporate Governance

ü  Similarities Between Business Ethics and Corporate Governance

	Overview	Example
1. Promote Accountability and Responsibility	Both frameworks aim to hold individuals and organizations accountable for their actions.	A CEO resigning due to a breach in governance or ethical misconduct reflects shared accountability.
2. Enhance Trust and Reputation	Ethical behavior and strong governance improve public perception and stakeholder trust.	Tata Group is respected globally due to ethical leadership and transparent governance.
3. Encourage Compliance and Integrity	Both stress the importance of following rules, whether internal codes (ethics) or external regulations (governance).	Infosys adheres to strict compliance with financial regulations and ethical standards.
4. Protect Stakeholder Interests	Both aim to protect the interests of stakeholders — including shareholders, employees, customers, and society.	Unilever’s sustainability initiatives consider both ethical responsibility and governance standards.
5. Drive Sustainable Business Practices	Long-term value creation is at the core of both. Ethical governance supports sustainability and business continuity.	Nestlé combines ethical sourcing and strong internal controls to maintain global sustainability.
6. Form the Basis of Corporate Culture	Both influences how a company’s culture is shaped — by promoting fairness, transparency, and moral behavior.	Ethics training and governance policies create a unified culture at companies like Google.
7. Interdependent in Practice	Good corporate governance often relies on ethical principles, and ethical behavior is sustained by governance systems.	Ethical lapses like in Satyam show how weak governance and poor ethics lead to collapse.

 

ü  Dissimilarities Between Business Ethics and Corporate Governance

Basis	Business Ethics	Corporate Governance
1. Nature	Based on moral values and conscience.	Based on laws, regulations, and structured policies.
2. Focus	Focuses on individual and organizational behavior — "doing the right thing."	Focuses on the system and structure of directing and controlling a company.
3. Source	Rooted in philosophy, religion, and social values.	Derived from legal mandates, corporate codes, and board guidelines.
4. Enforcement	Voluntary or self-imposed; relies on internal values.	Mandatory and enforceable through rules, audits, and legal actions.
5. Applicability	Applies to all levels — employees, managers, and leaders.	Mostly applies to board members, top executives, and key decision-making structures.
6. Measurement	Hard to measure directly — subjective and qualitative.	Easier to audit through checklists, reports, and compliance metrics.
7. Objective	Ensures morally sound decision-making regardless of profit.	Ensures company is governed in a way that protects stakeholder value and legal compliance.

 

5. Significance of Business Ethics

Significance	Explanation	Example
Trust and Reputation	Ethical behavior builds public trust and enhances brand image.	Tata Group is known for integrity and is respected globally.
Customer Loyalty	Customers support ethical brands.	The Body Shop gained loyal customers for opposing animal testing.
Attracts Employees	Talented individuals prefer ethical workplaces.	Google’s code of conduct encourages innovation and honesty.
Reduces Legal Risks	Ethical firms avoid fines and litigation.	Volkswagen’s emission scandal led to billions in fines.
Sustainable Growth	Ethics ensure long-term business survival.	Ben & Jerry’s integrates social missions into business strategy.

 

6. Significance of Corporate Governance

Significance	Explanation	Example
Investor Confidence	Transparent governance attracts investors.	Infosys is valued for its corporate governance, drawing foreign investment.
Risk Management	Reduces chances of fraud, mismanagement.	Laxmi Sunrise Bank introduced checks after governance-related challenges.
Compliance and Legal Safety	Ensures adherence to laws and regulations.	Failure at Satyam highlighted the need for governance reforms (in India).
Long-Term Value Creation	Sound governance leads to stable performance.	Unilever Limited’s board structures focus on consistent returns.
Stakeholder Satisfaction	Balances interests of all groups, not just shareholders.	Mahindra & Mahindra involves employee and community development.

 

So, ethics and corporate governance are integral pillars for building responsible, sustainable, and trustworthy businesses. While ethics guides individuals and organizations in making morally sound decisions, corporate governance ensures that companies are managed with accountability, transparency, and fairness. Together, they foster a culture of integrity, protect stakeholder interests, and enable long-term value creation.

Ethical behavior enhances trust, loyalty, and reputation, whereas strong governance minimizes risks, ensures compliance, and attracts investors. The evolution of these concepts—driven by scandals, legal reforms, and rising stakeholder expectations—reflects their growing relevance in today’s globalized, interconnected world.

Frameworks like stakeholder theory, the triple bottom line, and rights-based approaches help companies align profit-making with social responsibility. As businesses face complex ethical dilemmas in areas like AI, data privacy, and environmental impact, integrating ethics with robust governance is not just desirable but essential. Ultimately, companies that uphold both ethics and governance are better positioned to thrive and lead with purpose.

Thank You 

NRN Tech Commerce